Sunday 23 October 2016

Inheritance tax hitting families hard and needs a big shake-up

Published 31/05/2015 | 02:30

FOR SALE: Children who inherit the family home could be hit with a huge tax bill, forcing them to sell the property
FOR SALE: Children who inherit the family home could be hit with a huge tax bill, forcing them to sell the property

This country has one of the highest inheritance taxes in the world. The rate charged on gifts and inheritances has shot up by 65pc during the austerity years.

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Many parents are finding out that this means it is difficult to pass on their properties to their children without lumbering them with a big bill.

This is because the thresholds where the tax applies are so low, and the rate of the tax is so high. The rate of capital acquisitions tax has risen from 20pc in 2008 to 33pc now.

In conjunction with the rise in the rate, the inheritance tax thresholds (which limit the amount you can inherit tax-free) have been slashed. They have fallen from €542,544 for a son or daughter in early 2009 to €225,000 today.

This means that tax at the rate of 33pc applies on the excess over the tax-free threshold.

All of this means we have one of the toughest inheritance tax regimes in the world, according to Louth accountants UHY Farrelly Dawe White.

Smaller families, where there are few people sharing in the inheritance of a property, end up being hit hard by enormous inheritance bills.

And those who own property in Dublin are also among the biggest losers, as valuations tend to be much steeper in the capital and its surrounds.

Recovery in the property market has meant that the tax-free thresholds are very restrictive, catching large numbers of people in the tax net for inheriting their parents' or a relative's home.

Take someone who inherits a property from an aunt, where a €30,150 threshold applies. The property is valued at €200,000. This will trigger a tax bill of around €56,000.

Tax practitioners say pressure is building for changes to the capital acquisitions rules due to rising property prices. Many families hoping to inherit when their parents die may be unaware that they have a large inheritance tax problem that is festering and will crystallise when their parents die.

As part of the CAT regime, the Revenue has been clamping down on gifts parents offer their children, such as money towards a deposit on a house or a cash wedding gift.

Changes were made in this year's Finance Act on the grounds that thresholds exempting children from paying tax are being abused.

One way of gifting money, without impacting on the CAT threshold, is to offer €3,000 a year.

This can be funds given towards a mortgage, childcare, a holiday, or whatever else you wish. Both parents can transfer €3,000 each, each year. This means a child can receive €6,000 in total.

If a couple was to offer this to their daughter, son-in-law and two grandchildren, it would be a way of transferring €24,000 each year to a family with no impact on CAT thresholds.

But what is really needed is for major changes in the tax-free thresholds. The €225,000 threshold should be at least €300,000.

Finance Minister Michael Noonan has hinted at changes to inheritance tax. He needs to act on that in the Budget.

Twitter: @CWeston_Indo

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